The pending arrangement is notable not just because it would pair Juniper with the nation's largest ISP. In an interesting twist, the upstart gearmaker seems to have taken a page from the Cisco playbook to win the account, according to people familiar with the negotiations.
In order to persuade the
unit to dump longtime supplier Cisco, Juniper offered to give AOL about $40 million worth of new gear, plus $1.1 million to purchase and remove the existing Cisco equipment, according to the people close to the discussions.
The deal could be closed as early as this week, but observers say they wouldn't rule out a last-ditch effort by Cisco to keep AOL as a customer.
Juniper declined to comment. Cisco and AOL representatives didn't return calls seeking comment.
The deal helps underscore the comments Cisco made recently about industry price pressure, indicating that
widespread discounting has started to erode the company's lush profit margins. The fact that Juniper is starting to turn the tables also has been evident from recent
market-share reports that show Juniper is gaining business in the core mega-router arena at Cisco's expense.
Ironically, these hardball tactics were first mastered by Cisco in the 1990s, say analysts.
"This is how Cisco originally clawed its way to networking domination," says Johna Till Johnson, an information technology strategist with Nemertes Research. Johnson has done advisory work with all the major equipment companies.
While Juniper's $40 million gear giveaway gambit seems to be a steep price for admission, analysts point out that the big project promises years of recurring revenue from maintenance and upgrades.
Friedman Billings Ramsey analyst Susan Kalla estimates the contract could be worth $50 million annually for four years. That's a hefty slug of revenue for Juniper, which posted 2003 revenue of $701 million. By contrast, losing the deal would barely make a dent in Cisco's top line, which bulged to the tune of $22 billion for fiscal 2004 ended July.
That said, San Jose, Calif.-based Cisco can't like losing high-profile deals to its chief competitor. The AOL setback looms just as Cisco appears to be slipping in its core router business and, worse yet, finding few new areas of growth to offset the decline.
"Right now there is a window of vulnerability for Cisco," says Nemertes' Johnson. "They don't have a new rabbit to pull out of their hat."
While it's way too early to count Cisco out, Johnson says the company "is reaching a natural limit with its core capabilities."
Meanwhile, Sunnyvale, Calif., challenger Juniper isn't burdened with having to defend older generations of computer networking equipment. Instead, it can focus on selling critical high-margin routing gear that telcos and ISPs use to manage growing torrents of traffic.
Sure, the new outfit will have to give away a bunch of expensive gear and pay to haul away truckloads of its rival's equipment. "But that's standard operating procedure in the white-knuckle equipment supplier war," says Johnson.
"You weigh the cost of getting the customer with the long-term value of the relationship with that customer," Johnson adds.
The problem for Cisco is that suddenly it isn't the only gear peddler making that calculation.